Bridge loans gained traction during the run-up to the financial crisis of 2008 due to intense and rampant speculation. This resulted in skyrocketing home prices that ended up pricing many borrowers out of the housing market entirely. Thus, new loans started to make an appearance; among those, mortgage bridge loans were some of the most popular.

Under a bridge loan, borrowers take out a loan in order to repay their old mortgage and simultaneously put a down payment on their new home.

Within the context of an expanding housing bubble, it is understandable that many of these loans were advanced with the understanding that they would be used to get the borrower into the market, as quickly as possible. Such motives were not in the best interests of either the borrower or the lender, yet this went on in spades.

Mortgage bridge loans are meant to clear up unfortunate circumstances involving borrowers’ homes when they must move due to unforeseen reasons, such as a sudden change of employment. Bridge loans enable homeowners to get out from under their old home’s mortgage and into their new home. If the bridge loan works out, they may be able to make the transition flawlessly and without a hitch.

If there are any complications, such as the sale of the previous home falling through, the borrower is in a very dangerous position. This is because the lender can then seize the borrower’s old home in order to make good on the mortgage. If the purchase of the new home falls through, the borrower may find themselves homeless. Obviously, this is the worst case scenario for the borrower.

Bridge loans were used during the housing bubble to finance the purchase of such things as so-called “McMansions” and other luxury goods. Bonds backed by investment property mortgages were sold liberally, along with bridge loans. The end result was chaos.